496 B.R. 26
Bankr. D. Mass.2013Background
- Cellceutix contracted with Formatech to manufacture Kevetrin; Formatech was required to follow FDA CGMP and to notify Cellceutix of regulatory events.
- FDA inspection in 2010–2011 produced a Form 483 and a February 2011 Warning Letter; Formatech ceased or curtailed production and undertook remediation efforts.
- In March 2011 Cellceutix and Formatech executed an Alternative Payment Structure (APS) under which Formatech received cash and 184,375 shares of Cellceutix stock in payment for services.
- Formatech later filed bankruptcy (Aug. 2011); Cellceutix’s IND was placed on full clinical hold in Dec. 2011 because of Formatech’s CGMP violations.
- Cellceutix sued the chapter 7 trustee (after conversion) seeking damages and rescission of the APS (breach, Ch. 93A, fraud). Trustee moved to dismiss or for summary judgment; Sovereign Bank (secured creditor with a security interest in Formatech’s investment property) intervened and moved for summary judgment on priority to the stock/proceeds.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| 1) Did Cellceutix’s filing violate the automatic stay / should complaint be dismissed? | Filing an adversary in the bankruptcy court is proper to adjudicate rights; plaintiff may proceed. | Trustee argued adversary was improper and relief should be determined in claims process or dismissed. | Court: No stay violation; dismissal denied—adversary in debtor’s home court is permissible. |
| 2) Is rescission unavailable as a matter of law (failure to state a claim)? | Cellceutix alleges Formatech knew it could not perform (CGMP issues) and therefore APS is voidable and rescission is warranted. | Trustee says rescission is implausible and trustee’s §544 powers defeat rescission-based claim. | Court: Denied trustee’s dismissal—rescission plausibly pleaded; Cellceutix bears heavy burden but claim survives. |
| 3) Are Cellceutix’s damages claims ripe for summary judgment? | Seeks damages for breach, Ch. 93A and fraud based on alleged nondisclosure/misrepresentations about FDA actions. | Trustee contends no material misrepresentation/only negligence and that Cellceutix had notice. | Court: Genuine disputes of material fact exist as to notice, reliance and conduct; summary judgment denied on counts I–III. |
| 4) Does Sovereign Bank have superior rights to the stock/proceeds? | Cellceutix argued Sovereign may not be entitled to priority or must exhaust other collateral (marshaling). | Sovereign: holds a valid security interest in investment property and is equivalent to a purchaser for value; marshaling not shown. | Court: Granted Sovereign’s summary judgment—its secured interest in the stock/proceeds is superior to Cellceutix’s claim. |
Key Cases Cited
- White v. Dodge, 187 Mass. 449 (Mass. 1905) (voidable title doctrine: transferee holds voidable title until rescission)
- Abboud v. The Ground Round, Inc., 482 F.3d 15 (1st Cir. 2007) (trustee’s §544 powers analyzed)
- In re CRS Steam, Inc., 225 B.R. 833 (Bankr. D. Mass. 1998) (distinguishing rights of bona fide purchasers and judicial lien creditors re equitable claims)
- P.L.A.Y., Inc. v. NIKE, Inc., 1 F. Supp. 2d 60 (D. Mass. 1998) (rescission under Massachusetts law requires fraud/inequitable conduct, not mere breach)
- Worcester Heritage Soc., Inc. v. Trussell, 31 Mass. App. Ct. 343 (Mass. App. Ct. 1991) (rescission requires conduct that goes to essence of contract)
- Masingill v. EMC Corp., 449 Mass. 532 (Mass. 2007) (reasonable reliance required for fraudulent misrepresentation claim)